HOW TO OPTIMIZE MONEY
Knowing that your employees are doing their best to increase the value of their work and that all of the pieces you need to avoid friction are in place, if you are still seeing red gears on your money model, it’s finally time to take a look at your costs.
When we built our money models, I talked about three different kinds of money. Each of these requires a different approach to optimization. None of them are rocket science.
Starting from the left, look for the red gears on the sales funnel in your money model (where your potential money is). As you already know, the gears represent money and the size of the gears is based on ratios. These ratios are affected by how efficiently potential money is converted into actual money as it goes through the engine. A red gear means the money is below budget, which means results are below expectations.
When it comes to improving the conversion of potential money into actual money, your best bet may actually be investing more money into the system. By investing more in marketing, branding and public relations campaigns that get the word out about your business or in better training for the people selling your brand, you’ll have a good chance of turning your sales funnel gears green.
When I first launched my 1-800-GOT-JUNK? franchise back in 2003, we did not have the ability or money to execute a strong radio campaign. As the system grew, and other people bought adjacent franchises, we were able to pool our resources and buy local radio ads. This led to more local business, which led to more local PR opportunities, which led to more traffic, which led to more calls, leads, jobs, customers, and money. In our case, the joint marketing has been highly successful.
Take a good hard look at the red gears on the right side of your money model (where actual money is represented). Each of these gears indicates that you are either spending too much (expenses) or not generating enough (revenue). What you need to do is think about about ways you can add money into the system, or reduce the money leaving it, at each of those gears.
Periodically reassessing your costs is a good idea even if they’re not showing up red on your model. For example, every year, I run through all of my expense gears and attempt to negotiate better rates for everything. When I first started my junk business, my mobile phone bill was $2500 a month with Nextel. Now, the bill for the same service is $1200 a month. Part of the reason this is the case is because there is more competition in the mobile space, but the rates would not have gone down had I not worked to reduce them.
It is possible that you won’t be able to cut expenses or increase revenue to the point that all of the gears in your money model come out of the red range. If that’s true, you might need to look at the business model itself, or tap into cash reserves to ride out external factors beyond your control.
I currently spend 4% of all sales on buying fuel for my 1-800-GOT-JUNK trucks. When I first started the business, I spent 3% on fuel. When this year started, I budgeted 3.5% on fuel costs, so I’m .5% over budget so far. Obviously, I don’t control the cost of fuel and there is nothing I can do to reduce the expense. So, the fuel gear is red and there is nothing I can do to fix it except to budget a higher amount for this expense next year.
The bottom line is, you need to model the theoretical money as accurately as you can to see if the system can turn a profit. The harsh reality is that not every business engine is a profitable one.